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South Asia Investor Review is focused on reporting, analyzing and discussing the economy and the financial markets of countries in South Asia, including Pakistan, Bangladesh and Sri Lanka. For investors looking to invest in emerging markets beyond BRIC countries (Brazil, Russia, India and China), this blog is designed to help international investors looking to learn about investing in South Asia with focus on Pakistan. Riaz has another blog called Haq's Musings at http://www.riazhaq.com

Why did President Trump pull the United States out of the Paris Climate Deal? How will this impact the United States and the world? Can US still lead on matters related to energy? Will China and Europe pick up the mantle of world leadership on climate change and clean energy? Will US growing isolation cost American jobs?

Why has India's GDP growth slowed to 6.1% in Jan-March 2017 from 7.1% earlier? Is it the result of demonetization? Why has bank credit growth declined to just 5%, the slowest in 60 years? Is the growth in non-performing loans taking a toll on new lending by ailing public sector banks? How will it affect job growth in India?

Who is responsible for the massive Kabul blast that caused tragic loss of 100 lives? Did the Haqqanis do it? Why is the Afghan intelligence blaming it on Pakistan? How will the United States deal with the deteriorating situation after 16 years of war in Afghanistan? Will the Taliban accept talking with the Afghan and US representatives?

Does PMLN Senator Nihal Hashmi's scathing attack on judiciary and bureaucracy reflect the inner thinking within the Sharif family and the PMLN leadership? Is it an attempt to intimidate the judges and the bureaucrats involved investigating corruption allegations against Prime Minister Nawaz Sharif and his family members? Are they having a hard time dealing with accountability as never seen before by a ruling party in Pakistan?

South Asia. Regional growth is projected to remainstrong, at 6.8 percent in 2017. India is recovering fromthe temporary adverse effects of the end-2016withdrawal of large-denomination currency notes.Elsewhere in the region, growth in Pakistan isaccelerating this year, largely driven by robust domesticdemand and improved foreign direct investment, whileactivity in Bangladesh is moderating, reflecting apullback in domestic demand and in industrialproduction. Regional growth is expected to firm in2018-19, reaching an average of 7.2 percent, supportedby robust domestic demand, an uptick in exports, andstrong foreign direct investment. The regional outlookhas been slightly revised down from January, reflectinga more protracted recovery in private investment inIndia than previously expected. Risks to the outlook aretilted to the downside and include reforms setbacks,geopolitical tensions, and policy uncertainty.

Regional output expanded by an estimated 6.7percent in 2016, despite temporary disruptionsassociated with the November withdrawal andreplacement of large-denomination currency notesin India, the region’s largest economy (Table2.5.1). In general, South Asian economiesbenefitted from an improvement in exports, lowoil prices, infrastructure spending, and supportivemacroeconomic policies last year. In India, activitywas underpinned by favorable monsoon rains thatsupported agriculture and rural consumption, anincrease in infrastructure spending, and robustgovernment consumption (World Bank 2017l). InPakistan, agricultural output rebounded followingthe end of a drought, while the successfulcompletion of an IMF-supported programenhanced macroeconomic conditions and foreigndirect investment (FDI). Nepal’s economysuffered from lingering effects of the 2015earthquake and trade disruptions with India(World Bank 2017m). However, in somecountries, activity in 2016 was set back by a sharpdecline in remittances inflows (e.g., Bangladesh;World Bank 2016g), inclement weatherconditions that reduced agricultural output (e.g.,Sri Lanka), and security challenges (e.g.,Afghanistan).

A pickup in regional growth is underway in 2017.In India, recent data indicate a rebound this year,with the easing of cash shortages and risingexports (World Bank 2017l). An increase ingovernment spending in India, including oncapital formation, has partially offset soft privateinvestment. While manufacturing PurchasingManagers’ Indexes have generally picked up,industrial production has been mixed (Figure2.5.1). In Pakistan, favorable weather andincreased cotton prices are supporting agriculturalproduction, and the China-Pakistan EconomicCorridor infrastructure project, as well as a stablemacroeconomic environment, is contributing toan increase in private investment.

Regional growth isforecast to increase to 6.8 percent in 2017 and tostrengthen to an average of 7.2 percent in 2018-19, reflecting a solid expansion of domesticdemand and exports (Figure 2.5.2). ExcludingIndia, regional growth will remain broadly stableat an average of 5.8 percent in 2017-19, as easinggrowth in Bangladesh and Nepal offset gains inBhutan, Pakistan, and Sri Lanka.

While all attention has been focused on Modi sarkar, many of our states have been borrowing money like there is no tomorrow. Reserve Bank of India (RBI) recently reported that the debt-to-state GDP ratio of as many as 17 Indian states increased in the past year. For all states taken together, this ratio hit an alarming 3.6% in 2015-16 (breaching the mandated 3% ceiling under fiscal prudence rules) for the first time in 10 years. As RBI put it, “The consolidated finances of states has deteriorated in recent years…information on 25 states indicates that improvement in fiscal metrics budgeted by states for 2016-17 may not materialise.”This matters because it is state governments that really control most things that touch us directly — from land, electricity and water to schools, hospitals and state highways — and when foreign investors see India they don’t just see the central government but the combined health of the Centre and the states.So, which states have a real problem with managing their money? Uttar Pradesh is a big challenge for newly minted CM Yogi Adityanath, with its gross fiscal deficit to gross state domestic product ratio in 2015-16 going up to 5.6% (up from 3.1% the previous year). For Rajasthan, this ratio is a whopping 10% (up from 3.1%), Haryana 6.3 %(up from 2.9%), Bihar 6.9% (up from 3%), Madhya Pradesh 3.9% (up from 2.4%) and Goa 6.8% (up from 2.3%).Why does this matter to anyone other than accountants? Crudely put, the more a state borrows, the more it must pay back each year with interest — somewhat like your annual house EMIs — leaving lesser money to spend on development spending. This partly explains why 17 major states in the current financial year, according to a study quoted in TOI this week, have budgeted for a 10.8% rise in spending (compared to 19% last year) making it the slowest pace of increase in 13 years.

The rebellion is in full swing, and it seems the Paris agreement was the catalyst.

First came the Climate Alliance, a bipartisan group of Governors determined to uphold the pact despite the actions of the Executive Branch. Then came “We Are Still In,” a coalition of US states, businesses, and cities – representing one-third of the American population – that told the UN that they are still abiding by Paris.

Now, Governor Jerry Brown of California, one of the co-chairs of the Climate Alliance, has taken this one shocking step further. During his current tour of China, and shortly before meeting with President Xi Jinping, he signed an agreement with China that would see the rising superpower and the Golden State work together on cutting their greenhouse gas (GHG) emissions over time.

From renewable energy technologies to zero-emission vehicles, from low carbon infrastructures to electricity efficiency savings, both China and California will work closely together. A working group of top-level officials from both sides will continually plot ways to cooperate on climate measures and to zero in on initiatives that will help both countries cut their carbon footprints.

China has already shown over the last couple of years that it is serious when it comes to climate change mitigation. Although far from perfect, the world’s most prolific GHG emitter is investing heavily in wind, solar, and nuclear power and its coal production has reached a plateau. Ambitious, enormous clean energy projects by state-owned corporations are underway across the globe.

In this respect, California – a progressive pioneer in clean energy since the 1980s, and home to nearly 40 million people, more than most countries – is China’s natural ally on the subject. The two may disagree about many other things, but on their frustration with the President, and their work on climate change, they have mutual goals.

Upon signing the agreement early today with Wan Gang, the Chinese minister for science and technology, Brown reminded the world that the power of states should not be underestimated.

“California is the leading economic state in America and we are also the pioneering state on clean technology, cap and trade, electric vehicles and batteries, but we can’t do it alone,” Brown said before a Chinese delegation.

Secretary of Energy Rick Perry was also at the meeting in Beijing. Despite quietly hoping that the President would stay in the Paris agreement, he’s happily going along with Trump’s decision to withdraw. This surprise announcement by Governor Brown must have come as quite a shock to him.

This is nothing short of a powerful rebuke to Trump, and Brown knows it. It’s increasingly looking like it’s not America alone on the world stage – it’s the President.

Nearly eight months later (after demonetization), a lot of data is now available to help us assess what demonetization has actually wrought. Here it is, in a word: Demonetization failed to do what it was supposed to do, and although the immediate disruption it caused was less severe than feared at first, the policy’s impact is turning out to be more protracted than initially expected.

Very little black money has been caught. The truly corrupt hold their black money not as money at all, but as real estate and bank balances abroad. The government had authorized people to trade in up to 4,000 rupees in the canceled notes, so some parceled their 500- and 1,000-rupee bills into small bundles and got multiple agents (“money mules”) to change them, no questions asked. The government’s freshly minted 2,000-rupee notes promptly became the new stash currency of choice.

In the first weeks, even months, following demonetization, there was visible chaos. Soviet-era-style queues snaked in front of banks and A.T.M.s. The informal sector — mostly small traders, farmers and small unregistered businesses, which often don’t have bank accounts — reeled from cash shortages. But the immediate damage caused, though large, was not as large as some of us had feared. G.D.P. growth in the last quarter of 2016 was 7 percent and manufacturing activity continued to grow.

On the other hand, there may be greater long-term side effects than expected.The problems appeared unexpectedly, when agricultural products arrived on the market. In January, with cash shortages in full swing, demand plunged and food prices collapsed. By February, potato prices in Uttar Pradesh were just over half of what they had been during most of 2016 (at around 350 rupees per quintal, instead of over 600 rupees per quintal). Tomato prices were less than one-third. Onion prices in May were half of what they had been a year before. The cost of onions in India is notoriously volatile — and often influenced by politics and elections — but the likeliest culprit for this year’s drop was demonetization.

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An economy is a complex machine, and there is no way to be absolutely certain that the cause of all this is demonetization. But there is a telltale sign: Much of the slowdown originated in the financial sector. Rural loans increased by only 2.5 percent between October 2016 and April 2017, compared with 12.9 percent a year before. The rate of growth in overall bank credit declined.

The growth in industrial output in April was a paltry 3.1 percent, down from 6.5 percent the previous April. In the first quarter of 2017, the construction sector actually shrank, by 3.7 percent, over the previous quarter.

All this augurs poorly for the months to come: As the agriculture sector slows down in response to low crop prices and the credit shortage begins to bite, overall growth will likely fall further. The state-engineered shock of demonetization will continue to course through the economy.

Demonetization did boost the use of digital money, which is more efficient than paper money. But the government didn’t need to put 86 percent of the currency out of circulation to achieve that. Demonetization was too coarse an approach, and it accomplished too little while causing too much collateral damage.

"Significant gap/disparity among the known and declared sources of income and the wealth accumulated by the Respondent No. 1, 6, 7 and 8 have been observed," said the investigation team in its closing remarks.

“The financial structure and health of the companies in Pakistan having linkages to the Respondents also do not substantiate the wealth of Respondents,” added the document.

"Moreover, irregular movement of huge amounts in shape of loans and gifts from Kingdom of Saudi Arabia-based company (Hill Metals Establishment), United Kingdom based companies (Flagship Investments Limited and others) and United Arab Emirates based Company (Capital FZE) to Respondent No. 1, Respondent No. 7 and Pakistan based companies of Respondent No. 1 and family have been highlighted."

"The role of off-shore companies is critically important as several offshore companies [companies mentioned by name] have been identified to be linked with their businesses in UK while conducting this investigation. These companies were mainly used for inflow of funds into UK based companies; which not only acquired expensive properties in UK from such funds but also revolve these funds amongst their companies of UK, KSA, UAE and Pakistan."

"In addition to the companies, Respondent No. 1 and 7 have been found to be recipients of these funds movement into Pakistan as gifts/loans whose purpose/reason have not justified by them before the JIT. Needless to say, these UK companies were loss-making entities with heavily engaged in revolving of funds vis-a-vis creating a smoke screen that the expensive properties of UK were due to the business operations of these UK companies," added the closing remarks.

The investigative team refers to Section 9(a)(v) of the National Accountability Ordinance, 1999 in its report, which states - "A holder of public office, or any other person, is said to commit or to have committed the offence of corruption and corrupt practices [....] if he or any of his dependents or benamidars owns and possesses or has acquired right or title to any assets or holds irrevocable power of attorney in respect of any assets or pecuniary resources disproportionate to his known sources of income, which he cannot reasonably account for or maintains a standard of assets beyond that which is commensurate with his sources of income...."

"In any trial of an offence punishable under clause (v) of sub-section (a) of Section 9 of this Ordinance, the fact that the accused person on his behalf, is in possession for which the accused person cannot satisfactorily account, of assets and pecuniary resources disproportionate to his known sources of income, or that such person has, at or about the time of the commission of the offence with which he is charged, obtained an accretion to his pecuniary resources or property for which he cannot satisfactorily account, the Court shall presume, unless the contrary is proved, that the accused person is guilty of the offence of corruption and corrupt practices and his conviction therefore shall not be invalid by reason only that it is based solely on such presumption," states Section 14(c) of the National Accountability Ordinance, 1999, which was also brought forth by the report.

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Cloudcade:

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Human Development in Pakistan:

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I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
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